During a May 13 to 15 visit to Washington by Chilean President
Patricio Aylwin, George Bush announced that the United States soon
will embark on free trade negotiations with Chile. (For an in depth
analysis of U.S.-Chilean relations, see: Michael G. Wilson, "A U.S.
Role in Chile's Democratic and Economic Reforms," Heritage
Foundation Backgrounder No. 837, June 20, 1991.) Although Chile's
economy is small and has relatively little impact on the U.S., a
free trade agreement (FTA) with Chile would benefit America in a
number of ways. It would advance Bush's Enterprise for the Americas
Initiative (EAI), which seeks to create a Western Hemisphere free
trade zone stretching from Alaska to Antarctica. (The EAI was first
announced by Bush on June 27, 1990, and has attracted widespread
support from hemispheric leaders. Besides creating a free trade
zone stretching from Alaska to Antarctica, the EAI seeks to spur
regional prosperity and stability by assisting Latin American
countries in attracting foreign investment, offering debt relief,
and advancing free market solutions to environmental protection.)
This would benefit U.S. long-term political and economic interests
in the Americas. It also would highlight Chile's leadership in free
market reform and en- courage the spread of free trade throughout
Latin America. A U.S.-Chile FTA also would help sustain Chile's
impressive economic growth. And it would bolster Chile's democratic
reform program, while demonstrating a strong U.S. commitment to
Latin America.

Despite these benefits, the Bush Administration wants to move
slowly. The White House announced on May 13 that negotiations with
Chile would begin only after the North America Free Trade Agreement
(NAFTA) talks with Canada and Mexico are completed. However, Chile,
which signed an FTA with Mexico on September 22, 1991, wants to
move ahead with the free trade negotiations sooner. Chilean
business and government leaders have argued that the U.S. and Chile
should launch free trade talks as quickly as possible, rather than
waiting for the conclusion of the NAFTA talks.

Chileans have a right to be impatient with the Bush
Administration. Bush visited Santiago in December 1990, telling his
Chilean hosts that they soon would be the first country in South
America to strike a free trade deal with the U.S. (Leslie Crawford,
"Chile Grows Weary of U.S. Procrastination Over FTA," The Financial
Times, June 3, 1992, p. 5.) But after nineteen months, there has
been little action. To get things moving, Bush should:

Begin free trade talks with Chile as soon as
possible

The Bush Administration should complete free trade talks with
Chile by next May, when the Administration loses its special "fast
track" negotiating authority from Congress. (Fast track authority
was granted to the Bush Administration by Congress in May 1991.
Under fast track authority, trade agreements are guaranteed an
up-or-down vote by Congress, without nuisance amendments and
protectionist tinkering that almost certainly would kill most trade
negotiations.) Waiting to begin talks until after the November
presidential elections or until Congress votes on NAFTA, probably
sometime next spring, could place a U.S.-Chile free trade pact in
jeopardy. First, there is no guarantee that Bush, the FTA's biggest
champion, will be re-elected. (Democratic Presidential candidate
Bill Clinton, not a strong promoter of free trade, has yet to
announce a position with regard to the proposed U.S.-Chile FTA. He
has given only tentative support to the NAFTA. Bush, on the other
hand, is strongly committed to advancing free trade in the Americas
through bilateral agreements and the EAI.) And second, mounting
protectionist sentiment in the U.S. Congress could delay NAFTA
indefinitely or even derail it, thereby torpedoing any other free
trade pact in the region.

Make it clear that while Chile is the first country to
participate in the Enterprise for the Americas Initiative, others
soon will follow

This will demonstrate a strong U.S. commitment to advancing the
EAI and will encourage continued free market reforms throughout the
region.

Once the negotiations are underway, a U.S.-Chile FTA should:

Quickly phase out all tariff and most non-tariff
barriers to trade with Chile

Provide for periods of adjustment to less competitive
industries hardest hit by an FTA

While it is unlikely that there will be any employment shifts or
losses in the U.S. as a result of a U.S.-Chile FTA, small
adjustment periods will help minimize not only relocation and
retraining costs for some employees, but profit losses for
companies involved in the fruit growing, textiles, and mining
sectors.

Create procedures and mechanisms to resolve potential
trade disputes

Complex environmental and labor laws in the U.S., combined with
overlapping jurisdictions of power between state and federal
agencies and judicial systems, can create barriers to trade with
other countries. These and other types of non-tariff barriers need
to be reduced. To do this, the U.S. and Chile should establish a
commission to settle rapidly trade disputes over environmental,
labor, or health laws that block free trade.

Establish "rules of origin"

These are rules that govern the export of goods manufactured
with items imported from a country not participating in the free
trade agreement. As in all FTAs, these rules will be necessary to
prevent other countries from taking advantage of the duty-free
provisions in the trade treaty.

Chile: From Socialism to a Free Market
Model

Chile is an ideal candidate for a free trade agreement with the
U.S. because its economic reforms have been so successful. Chile
embarked on its campaign of free market reforms in the mid-1970s.
The government of Augusto Pinochet eliminated price controls,
reduced tariffs across the board to a flat rate of approximately 10
percent, privatized most of Chile's large state-owned companies,
cut back restrictions on foreign investment, and reduced taxes.

This economic reform paid off. Since the mid-1980s, the economy
grew an average annual rate of 5.7 percent, inflation dropped to 18
percent from 500 percent in 1973, (James R. Whelan, Out of the
Ashes: Life, Death and Transfiguration of Democracy in Chile,
1833-1988 (Washingon, D.C.: Regnery Gateway, 1989), p. 418.)
unemployment decreased from 12 percent to approximately 4.5 percent
today, average salaries are rising, and exports climbed last year
to over 30 percent of Chile's Gross Domestic Product (GDP). (See
Alejandro Foxley, "The Future of U.S.-Chilean Relations," Heritage
Lecture No. 323, May 1, 1991.) Chilean products are of high quality
and compete favorably in world markets. Because foreign investors
are offered low taxes, strong legal protection of their investments
and property, and favorable rules on taking home profits, they have
invested some $6 billion in Chile since 1985. By the mid-1990s,
foreigners are expected to commit some $10 billion in new capital
to Chile's robust economy. (For more information see John F. H.
Purcell and Dirk W. Damrau, "Chile: An Investment-Grade Credit,"
Salomon Brothers, May 1991.)

Growing U.S.-Chilean Economic Ties

This successful record of free market reforms and Chile's new
democratic government is behind the U.S. interest in free trade
talks with Chile. Washington and Santiago signed a free trade and
investment framework agreement on October 1, 1990, paving the way
for a U.S.- Chile FTA. The accord established a joint U.S.-Chile
Council on Trade and Investment to monitor bilateral economic ties
and to further open markets to both nations. On the Council's
agenda are how to: cooperate in the Uruguay Round of multilateral
trade negotiations in the General Agreement on Tariffs and Trade
(GATT), increase access to each other's markets, protect
intellectual property rights, spur foreign investments, and promote
the EAI.

These trade talks come on the heels of ballooning trade between
Chile and the U.S. Trade between the two countries has grown
without interruption for eight straight years, reaching some $3.4
billion in 1991. The U.S., in fact, is Chile's principal trading
partner, accounting for about 20 percent of Chile's total imports
and absorbing 17 percent of its exports. Within the past decade,
U.S.-Chilean trade doubled in volume. ("Chile Economic Trends
Report," Embassy of the United States, Santiago, Chile, November
1990, p. 19.)

According to the Central Bank of Chile, Chilean exports to the
U.S. in 1991 reached almost $1.6 billion. The composition of these
exports, however, has changed over the past ten years. While copper
continues to be the main U.S. import, other Chilean goods such as
fresh fruit, seafood, chemical products, and wine have found their
way to the American marketplace.

U.S. exports to Chile, America's 35th largest market, totaled
approximately $1.8 billion in 1991. This represents an increase of
10 percent from 1990. Chile's imports from the U.S. are heavily
weighted toward high-tech equipment, such as computers, and
consumer goods. (For more information on the content and quantity
of U.S.-Chile trade, see "Trade and Investment Between Chile and
the United States for 1990," Embassy of Chile, August 1991.)

The U.S. also is the principal foreign investor in Chile's
banking, insurance, forestry, mining, light manufacturing, and
agricultural industries. As a result of the high returns on foreign
investments in Chile, a total of $1.3 billion in foreign investment
flowed into Chile in 1990 alone. This amount equaled 5 percent of
Chile's GDP, the highest rate of growth in Latin America and six
times the average rate for the region.

Nine Reasons for a Free Trade Pact with
Chile

Building on this legacy of expanded free trade is reason enough
to begin free trade talks with Chile. But there are other reasons
as well -- nine, in fact. They are:

Reason #1: Chile's economy is one of the most open and advanced
in Latin America and would be the easiest with which to negotiate
an FTA.

Chile has moved farther and faster than virtually any other
country in Latin America in implementing free market reforms. When
Pinochet seized power from the Socialist government of Salvador
Allende in September 1973, a bold economic reform program based
upon private enterprise and an open market was launched. Following
its election in December 1990, the democratic Aylwin government has
continued this free market program with great success. For example,
Chile has reduced its government-owned enterprises from
approximately 500 in the mid-1970s to about 50 today. Moreover, the
average tariff rate has dropped from about 105 percent during the
Allende years to 11 percent this year. And while Chile's GDP was
shrinking by some 12 percent in the early 1970s, this year it
likely will grow by 7.5 percent. ("U.S. Market Access in Latin
America: Recent Liberalization Measures and Remaining Obstacles,"
United States International Trade Commission Report No. 2521, June
1992, pp. 5-1 to 5-22.) Consequently, Chile's economy is one of the
fastest growing and most open in the world.

Because of Chile's free market reforms, its economic success
story, and its open economy, a U.S.-Chile FTA will be relatively
easy to negotiate. Potential disputes over excessive trade
barriers, high taxes, unprotected property rights, foreign
ownership limitations, profit repatriation, and government
subsidized industry will not greatly complicate trade negotiations
with Santiago.

Reason #2: Chile's return to democracy would be rewarded and
strengthened.

An FTA with Chile will help the Aylwin government's democratic
reforms succeed by making Chile economically prosperous and stable.
A free trade pact with the U.S., the world's largest economy, will
create new and better paying jobs in Chile, thereby lessening
political tensions caused by poverty and unemployment. An FTA also
will help sustain Chile's impressive economic growth rate.

Reason #3: Bush's Enterprise for the Americas Initiative would
be accelerated.

The completion of a U.S.-Chile Free Trade Agreement would
accelerate Bush's EAI by encouraging other bilateral and
multilateral FTAs throughout the Americas. Such free trade
agreements are a major goal of EAI, which was launched by Bush in
June 1990. An FTA with Chile would be tangible proof that the
Initiative's goals are attainable and that Washington is committed
to improving trade ties and promoting economic opportunity in the
Americas. If, however, Chile fails to obtain a free trade agreement
from the U.S., other countries in Latin America would be
discouraged. As Alejandro Foxley, Chile's Finance Minister, put it:
"We are impatient to see concrete results from the U.S. president's
Enterprise for the Americas Initiative. Middle income countries
like Chile are experiencing trade negotiation fatigue." (Crawford,
op. cit., p. 5.)

The EAI cannot advance without a Chilean FTA because Washington
needs Santiago's leadership and example to encourage other
countries in the region to adopt similar free market economic
policies. Chile, moreover, is the only country other than Mexico
that is ready today to sign an FTA with the U.S.

Reason #4: Other countries in Latin America would be encouraged
to follow Chile's democratic and free market model.

Rapidly concluding an FTA with Chile would encourage other
countries in Latin America to imitate Chile's successful economic
and democratic reforms. These countries are eager to sign free
trade pacts with Washington. They believe that these agreements
will attract American investment and boost exports to the U.S. If
Chile's reform program is rewarded with an FTA, other Latin
American countries will conclude that their reforms also will be
rewarded. Already Argentina, Bolivia, Colombia, Costa Rica, El
Salvador, Uruguay, and Venezuela are modeling much of their
economic reform programs on Chile's. It is especially important
that they do so in light of the September 1991 coup in Haiti, the
failed February 1992 coup attempt in Venezuela, and the April 1992
military-backed coup in neighboring Peru by President Alberto
Fujimori. The momentum toward democracy and free market reforms,
first started by Chile, must not be allowed to slow because of
setbacks in these troubled nations.

Reason #5: Chile's long-term economic and political stability
would be promoted.

An FTA will help institutionalize the free market and democratic
advances made in Chile. This would be done by increasing Chilean
exports, creating new and better jobs, attracting new foreign
investment, and generating increased wealth and economic stability.
The more productive the ties between Chile and the world's largest
free market democracy, the greater the possibility of long-term
success for Chile's free market and democratic revolutions.

Reason #6: There is little opposition from U.S. labor
unions.

A free trade agreement with Chile will meet little opposition
from organized labor in the U.S. In fact, the AFL-CIO is not all
that concerned about an FTA with Chile. ("U.S.-Chile FTA May be in
Works," The News, Mexico City, Mexico, May 3, 1992, p. 19.) The
reason: Chilean sales of fruit and seafood to the U.S. require the
intensive use of American labor at ports, and thus will create new
jobs there. The obstacle in the U.S. for a FTA with Chile,
therefore, is not protectionism, but indifference.

Reason #7: There is little competition from Chilean farmers.

Chile's growing seasons are the reverse of those in the U.S.
When U.S. produce is coming to market, Chile is in the midst of
winter -- and thus is not exporting its grapes, peaches, plums, and
apples to the U.S. The result: Chile's agricultural exports do not
compete directly with American farmers. Lacking competition from
Chilean farmers, American farmers and agricultural groups will be
less opposed to a free trade pact with Chile than one with Mexico,
which has the same growing season as the U.S. (See "Trade and
Investment Between Chile and the United States," The Embassy of
Chile, Washington, D.C., August 1991.)

Reason #8: New investment opportunities for U.S. companies in
Chile would be created.

Americans already have some $1.5 billion invested in Chile,
primarily in mining, financial services, agriculture, forestry, and
telecommunications. According to the Commerce Department, U.S.
profits on investments in Chile have been more than 40 percent per
year for the past four years. Chile offers American investors
political stability and a well-educated work force. It already is
the fastest growing market in Latin America for such U.S.-produced
capital equipment as mining and agricultural machinery. By removing
trade barriers and restrictions on investment, a free trade pact
would facilitate American investments in Chile. (See Wilson, op.
cit., p. 10.)

Reason #9: The economic competitiveness of both countries would
be increased.

The competitiveness of U.S. and Chilean companies not only will
improve against Pacific Rim nations like Japan, South Korea, and
Taiwan, but also against the European Community. American companies
will be able to combine their advanced technology and highly
skilled labor with Chile's cheaper labor to cut prices on their
exported products. The amount of capital available for U.S. and
Chilean products will grow as global demand for their products
increases and their operations expand.

U.S.-Chile Free Trade Agreement: A Key to Prosperity in
the Americas

The Bush Administration must back up its call for free trade
negotiations with Chile with concrete and immediate actions. A
U.S.- Chile FTA will help consolidate and expand the mutually
beneficial relationship that has developed between the two
countries. Today, moreover, there is an opportunity to forge a
permanent and profitable economic bond between the U.S. and the
other countries in the Western Hemisphere. An FTA with Chile will
help launch this process.

To spur economic prosperity throughout the Americas, the Bush
Administration should:

Begin free trade talks with Chile as soon as possible. The Bush
Administration wants to delay free trade talks with Chile until
after the NAFTA has been approved by Congress. This is a mistake.
It would be far easier to gain congressional approval of a free
trade treaty with Chile than one with Mexico. There is less U.S.
opposition to free trade with Chile, and American labor unions,
which oppose NAFTA, are not as worried about expanded trade with
Chile. Thus, a delay in starting negotiations with Chile would only
waste time.

The Bush Administration, therefore, should notify Congress
immediately of its intention to negotiate a free trade pact with
Chile. Under "fast track" rules, free trade talks cannot begin
until 60 legislative days after Congress has been notified. Waiting
until after the November 3 presidential elections or until Congress
votes on NAFTA could jeopardize a U.S.-Chile FTA. For one thing,
there is no guarantee that Bush, the FTA's biggest champion, will
be re-elected. For another thing, protectionist sentiment in the
U.S. Congress could delay NAFTA and ruin chances for any other free
trade pact in the region.

Make it clear that while Chile is the first country to
participate in the Enterprise for the Americas Initiative, others
soon will follow. A free trade agreement with Chile will give new
life to the EAI and prove to other Latin American and Caribbean
leaders that the EAI is working. Washington should signal to
Argentina, Costa Rica, Colombia, and Venezuela that they too will
benefit under the EAI program. As soon as these countries are
ready, the U.S. will begin free trade talks with them as well.

Once negotiations are underway, a U.S.-Chile FTA should:

Quickly phase out all tariff and most non-tariff
barriers to trade with Chile

Rapidly eliminating U.S. tariffs will greatly benefit Chilean
exporters who rely heavily on exports to the U.S. Yet a surge in
Chilean exports to the U.S. will not hurt American producers or
cost U.S. jobs. The reasons: 1) job losses in one sector will be
offset by job gains in others; and 2) there will be few if any job
losses in the most vulnerable sectors of the American economy,
including mining, textiles, and agriculture, because Chile's
growing seasons are opposite of those in the U.S. Since Chilean
goods represent only 0.3 percent of overall U.S. imports, even a
large increase of Chilean imports would not greatly affect the U.S.
job market.

Lower all other barriers to international trade and
investment

Accomplishing this entails reaching agreements on such issues as
intellectual property rights, fair access to natural resources,
lifting restictions on foreign ownership, strong property rights
laws, environmental regulations, labor laws, and health standards.
For example, Washington and Santiago should improve Chile's 1991
intellectual property rights laws. One way of doing this would be
to lengthen Chile's patent protection of U.S.-manufactured
pharmaceuticals from fifteen years to seventeen years. In addition,
Chile should follow the lead of Mexico by granting protection for
foreign pharmaceutical products that are under development abroad
but not yet marketed inside Chile. This way U.S. pharmaceutical
manufacturers can be assured that their products will not be copied
and sold inside Chile before a patent agreement has ben reached
with the government.

Provide for periods of adjustment to less competitive
industries hardest hit by an FTA

After a free trade pact is signed between Washington and
Santiago, most tariffs and quotas should be eliminated immediately.
However, in certain less competitive sectors, such as fruit growing
and textiles, a schedule for phasing out tariffs will have to be
established. While it is unlikely that there will be any major
employment shifts or losses in the U.S. as a result of a U.S.-Chile
FTA, small adjustment periods of less than ten years will help
minimize relocation and retraining costs for some employees. These
adjustment periods also will reduce profit losses for some
companies involved in the fruit growing, textiles, and mining
sectors of the American economy.

Create procedures and mechanisms to resolve potential
trade disputes

As trade between countries expands, a number of complicated
trade issues arise. One such incident occurred in March 1989 when
the U.S. Food and Drug Administration banned Chilean grape imports
after two grapes tainted with cyanide were found in Philadelphia.
The discovery temporarily brought to a standstill one of Chile's
most vital industries. Complex environmental and labor laws in the
U.S., combined with overlapping jurisdictions of power between
state and federal agencies and judicial systems, also can create
barriers to trade with other countries. A U.S.-Chile FTA should
therefore establish a commission to settle all trade disputes as
rapidly as possible.

Establish "rules of origin"

As with the 1989 U.S.-Canada FTA and NAFTA, a U.S.-Chilean free
trade pact likely will include rules of origin. These are laws that
govern the export of goods manufactured with items from a country
not participating in the free trade agreement. Under the U.S-Canada
pact, these content rules were set at 50 percent; rules have yet to
be determined in the NAFTA talks. These rules should be aimed at
promoting free trade and free market reforms among countries
outside of the U.S.-Chile FTA, not discouraging investment in
either country or serving as a disguise for "managed trade" between
Washington and Santiago. While it is still too early to recommend a
specific percentage for the U.S.-Chile content rules, it might be
advisable to use the same percentages negotiated under the NAFTA.
This would eliminate unnecessary confusion and regulation in
linking Chile to North American free trade.

The debate over U.S.-Chilean rules of origin will be much less
problematic than during the NAFTA talks with Mexico. It is unlikely
that such Asian countries as Japan and South Korea will establish
bases of operations in Chile to export products duty free to the
U.S. market. The distance involved and transportation costs would
be too great and the availability of unemployed or cheap labor in
Chile is relatively low compared to other Latin American countries.
The debate over rules of origin, however, could heat up if the U.S.
uses Chile as a base of operations for re-export to Chile's
neighbors, including Argentina and Brazil.

Conclusion

The U.S. and Chile both will be winners under a free trade pact.
The benefits for the U.S. will be increased markets for American
goods; lower priced, better quality products for consumers; more
jobs; and a more stable and economically prosperous Latin America.
For Chile, the key benefits of an FTA will be more jobs, increased
export earnings, more U.S investment, a more competitive economy,
and greater political stability resulting from economic growth and
prosperity.

Now that countries like Argentina, Chile, Mexico, and Venezuela
have the confidence to seek free trade agreements with the U.S.,
Washington7should not lack the confidence or leadership to
negotiate these agreements. The Bush Administration can fortify
Chile's impressive gains and create strong incentives for free
market reform throughout Latin America by signing a free trade pact
with Chile. Bush also should enlist Chilean President Patricio
Aylwin's help to promote the Enterprise for the Americas
Initiative. A U.S.-Chile FTA will be a first, but very important
step in this direction. As a model other Latin American countries
will surely follow, it will advance President Bush's EAI, and thus
create new and vibrant markets throughout the Western Hemisphere
for U.S. products. It also will help spread economic prosperity and
political stability in the region. Not unimportant, of course, is
the fact that an FTA would represent a sign of good faith by the
U.S. in the Aylwin Administration.

By contrast, indifference or inaction by Washington could set
back progress toward free markets, democracy, and security in the
Americas. If the Bush Administration does not take advantage of the
current pro-free market and pro-democracy mood in the region, Latin
American countries could grow increasingly skeptical of U.S. free
trade policy. This could lead to socialist and anti-democratic
backlashes throughout the region. In the long run, therefore,
Chile's success or failure will help determine whether Latin
America remains mired in poverty, debt, drugs, and violence, or
joins the U.S., Canada, and Mexico in creating what could become
the world's most prosperous and competitive free market -- a free
trade zone spanning the entire Western Hemisphere.

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If the Bush Administration does not take advantage of the currentpro-free market and pro-democracy mood in the region, LatinAmerican countries could grow increasingly skeptical of U.S. freetrade policy.

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